MANAGING PRIVATE FUND DISPUTES · By Matthew Crawford and Luke Stockdale, Maples and Calder Introduction 201 Courts in the Cayman Islands 201 Court procedures and timing 202 Access

Edited by Hilton Mervis, King & Wood Mallesons LLP

Essential strategies for preventing and resolving litigation and regulatory risks

MANAGING PRIVATE FUND DISPUTES

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Contents

About the editor xiEditor’s introduction xiii

SECTION I: UNDERSTANDING PRIVATE FUND DISPUTES 1

1 Optimising the dispute process: 13 practical tips for winning the case 3By Hilton Mervis, King & Wood Mallesons LLPEditor’s foreword 31. Take legal advice at an early stage: Avoid initial mistakes 42. Alternative funding options 63. Work out a strategy for winning the litigation 64. Managing the media 85. Obtain evidence and documents/make use of injunctive relief 96. Consider carefully the impact of settlement options 117. Do not litigate in correspondence 138. Mediation 139. Witnesses 1510. Get the best out of lawyers in other jurisdictions 1611. Delay in proceedings 1712. Get the best from your team 1813. Choice of dispute resolution clause 19Final thoughts 20

2 Activist, protective and defensive litigation 21By Richard Garcia, Stephenson Harwood LLPEditor’s foreword 21Introduction 21Pre- and post-financial crisis issues 22Activist litigation 25Protective litigation 28Defensive litigation 30Conclusion 37

3 Jurisdiction, choice of law, arbitration and dispute resolution clauses 39By Lawrence Cohen QC and Harris Bor, Wilberforce ChambersEditor’s foreword 39Introduction 40Jurisdiction clauses 40Choice of law 45Arbitration clauses 46

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Other dispute resolution clauses 49Conclusion 49

4 International arbitration of private equity disputes 51By Timothy J. Lindsay, Dechert LLPEditor’s foreword 51Introduction: Importance of planning 51What is international arbitration? 52Advantages of international arbitration for cross-border private

equity transactions 53Structuring deals to protect against sovereign risk: International

investment agreements 54Case studies 56Drafting international arbitration agreements 57Conclusion 60

5 Navigating the regulatory landscape and avoiding common missteps 61By Harry S. Davis and Brian Burns, Schulte Roth & Zabel LLP Editor’s foreword 61Introduction 61Overview of US regulatory bodies 61Overview of UK regulatory bodies 63Regulatory and criminal investigations: Processes and procedures 63Types of enforcement actions 75Extraterritorial application of US securities law/cooperation with

foreign authorities 81Enforcement remedies 83Case study 1: Expert networks 88Case study 2: Lessons from the Quantek case 89Conclusion 91

6 A high-level overview of private equity disputes in China 93By Richard Yun and Jane Wang, King & Wood Mallesons LLPEditor’s foreword 93Introduction 93Common disputes in China 94Dispute resolution forums in China 97Case study: The Haifu case 98Case study: The CIETAC arbitration case on VAM 100Conclusion 101

SECTION II: COMMON DISPUTE SCENARIOS 103

7 Disputes arising from the ownership of the private equity house 105By Andrew Thompson QC, Erskine Chambers Editor’s foreword 105Introduction 105

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Contents

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Who owns the private equity house? 106Key features of ownership structures 107Sources of disputes 109Resolving ownership disputes 111Conclusion 115

8 Forfeiting limited liability: The hidden risks for private equity investors 117By Roderick I’Anson Banks, Partnership Counsel Editor’s foreword 117Introduction 117Participation in management: common dangers areas 118Other danger areas 124Loss of limited liability: The true implications 125Henderson on liability: Was the court correct? 126Conclusion 128Appendix 1: Case summaries 129Appendix 2: Removing GPs 129

9 Searching for the true meaning: How the courts approach the interpretation of clauses in the LPA 133By Hilton Mervis, King & Wood Mallesons LLPEditor’s foreword 133Introduction 133GP removal clauses 134The law on interpretation 139Conclusion 143

10 Defaulting investors, penalty clauses and relief from forfeiture 145By Steven Gee QC, Stone ChambersEditor’s foreword 145Introduction 145Remedies against defaulting investors 146Law on penalty clauses 151Relief from forfeiture 153Conclusions 154

11 The law on privilege and its impact on fund managers 157By Neil Henderson, 4 Pump Court Editor’s foreword 157Introduction 157Privilege explained 157Rights and obligations of disclosure 158Legal professional privilege 159Joint privilege 161Common interest privilege 162No privilege depending on the relationship 164

Contents

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Contents

Without prejudice communications 165Conclusion 168

12 Claims in relation to the PPM 169By Jeremy Kosky, Maxine Mossman and Michael Lyons, Clifford Chance LLPEditor’s foreword 169Introduction 169Where to start when considering a claim 169Accuracy of the PPM 171Reliance and causation 172Exclusion and limitation clauses 173Remedies 174Fraud 175Alternative claims 176Statutory liability, criminal offences and regulatory issues 177Conclusion: Protecting a fund against claims 178

13 Private equity deals: Managing post-completion disputes 181By Alex Leitch, King & Wood Mallesons LLP Editor’s foreword 181Introduction 182Expert determination 182Warranties 185Indemnities 188

SECTION III: COMMON JURISDICTIONS FOR DISPUTE RESOLUTION 191

Editor’s foreword 191

14 Disputes involving the United States (Delaware) 193By Ellisa Opstbaum Habbart and Elizabeth M. Bennett, The Delaware Counsel Group, LLPIntroduction 193Hallmarks of Delaware 193Litigation 196Conclusion: Delaware law as national law 199

15 Disputes involving the Cayman Islands 201By Matthew Crawford and Luke Stockdale, Maples and Calder Introduction 201Courts in the Cayman Islands 201Court procedures and timing 202Access to information 203Winding-up proceedings 203Interim/urgent relief 203Assistance to foreign parties and courts 204Enforcement of foreign judgements/awards 204

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Investment fund litigation 205Conclusion 207

16 Disputes involving the British Virgin Islands (BVI) 209By William Hare and Alistair Abbott, Forbes Hare Introduction 209Court system 209Court procedures and timing 210Access to information 212Interim/urgent relief 212Corporate matters 213Winding up on ‘just and equitable’ grounds 214Minority shareholder actions 215Assistance to foreign parties/courts 215Enforcement of foreign judgements and awards 216Arbitration 218Investment fund litigation 218Conclusion 221

17 Disputes involving Jersey 223By Mark Taylor, Bedell Cristin Jersey PartnershipIntroduction: The constitution 223The court system 223The legal profession 224Proceedings before the Jersey court 224Directors’ duties 225Types of action 226Limitation periods 229Discovery from third parties 230Foreign jurisdiction proceedings 230Conclusion 231

SECTION IV: LITIGATION AND REGULATORY RISKS 233

18 Reducing portfolio-company risk in the new regulatory environment 235By Blaise Duault, PAI Partners, and Hilton Mervis, King & Wood Mallesons LLPEditor’s foreword 235Introduction 235AIFMD Requirements 236Impact of AIFMD on the management of private equity funds 237Liability in the United States 241Impact of compliance failures: Case law 241Conclusion 242

19 Corporate bribery and corruption: Understanding and mitigating the risks 245By Toby Duthie and Jimmy Ko, Forensic Risk Alliance Editor’s foreword 245

Contents

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Introduction 246The regulatory landscape 246Key BC risks for private equity firms 251Responding appropriately to BC issues 256Conclusion 257

20Corporate bribery and corruption law in Australia 259By David Eliakim, Justin McDonnell and Natalie Caton, King & Wood Mallesons LLPIntroduction 259The law 259Enforcement regime 262Conclusion 263

21Mitigating bribery and corruption risk in China 265By David Tiang, King & Wood Mallesons LLPIntroduction 265Anti-bribery corruption laws and regulations in China 267Bribery and corruption risk for private equity firms 269How to minimise risk 270Conclusion 272

22Impact of the UK Bribery Act on private equity firms 273By Shaistah Akhtar, King & Wood Mallesons LLP Introduction 273Exposure under the UKBA 274Proceeds of Crime Act 2002 (POCA) 276FCA enforcement 277Conclusion 278

23The intercontinental reach of US anti-corruption efforts 279By Matthew Reinhard, Miller & Chevalier CharteredThe extraterritorial reach of FCPA 279Industry sweeps 281Global cooperation of regulatory agencies 282Advice for private equity firms 283Conclusion 284

24 Reducing the risk of violating competition law 285By L. Donald Prutzman, Michael G. Tannenbaum and Andre R. Jaglom,Tannenbaum Helpern Syracuse & Hirschtritt LLP and Tom Usher and Adele Behles, King & Wood Mallesons LLP Editor’s foreword 285Introduction 286

COUNTRY FOCUS

COUNTRY FOCUS

COUNTRY FOCUS

COUNTRY FOCUS

Contents

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Agreements among competitors 286Case study: Dahl v. Bain Capital 287Regulatory review of acquisitions – advice for private equity firms 289Antitrust issues in potential acquisitions 289Goldman Sachs/Prysmian case 292Effective strategies for mitigating competition risk 293Conclusion 293

25 A cautionary tale for non-US private equity firms: Exposure to the extraterritorial reach of US sanctions 295By Adam Kaufmann and Hillary Rosenberg, Lewis Baach pllc Kaufmann MiddlemissEditor’s foreword 295Introduction 296Overview of US sanctions 297Extraterritorial application of US sanctions 299Conclusion 301

26 Managing reputational risk in private equity 303By James Read and Martin Ivanov, Macquarie Group Editor’s foreword 303Introduction 303Defining reputational risk 303Recent fines and impacts 305Sources of reputational risk 306Mechanisms for controlling reputational risk 307Include a reputational risk review in the compliance mandate 308Conclusion 308Top tips for handling a crisis and the media 310

About King & Wood Mallesons LLP 312

About PEI 314

Contents

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About the editor

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Hilton Mervis is a partner in the litigation and dispute resolution group at King & WoodMallesons LLP.

Hilton has extensive expertise in large-scale international commercial litigation, com-plex fraud, shareholder/joint venture disputes, banking litigation, professional negli-gence, corporate reputation and regulatory investigations and is an established leaderin the field. He is recognised as a leading specialist for contentious issues arising in thefunds sector and coordinates the King & Wood Mallesons’ London Corporate andPartnership Dispute Resolution group. Hilton has built up extensive experience inbringing cases to a successful resolution prior to trial.

Hilton is a solicitor advocate with higher rights of audience and also an ADR GroupAccredited Mediator. He acts regularly for institutional clients and in high-profilereported cases. He is a founder member of the Commercial Litigators Forum(www.commerciallitigatorsforum.com), which includes representatives of all the majorLondon litigation practices and has groups in Moscow and New York.

Hilton is recognised in the leading independent directories, Chambers UK, ChambersGlobal, Chambers Europe, Legal 500 and The Who’s Who Legal 2014 Litigation edi-tion, as a leader in his field for both commercial litigation and partnership disputes. InChambers, he is praised for being a “brilliant lateral thinker”, “good strategist with acreative mind who takes innovative points” and as a “fierce advocate for his clients”.

Hilton is married to Vivienne and has three children, Rachel, Daniel and Julia. He grad-uated with a law degree from University College London (LLB Hons) where he enjoyed,among other activities, mooting (mock legal arguments) and won the Moots Cup.Hilton has “no notable hobbies but enjoys the occasional building project and retain-ing a sense of humour”. n

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Editor’s introduction

Managing Private Fund Disputes is designed to provide invaluable advice for recognis-ing, avoiding and ultimately winning disputes and reducing the regulatory risks thatarise throughout the lifecycle of a fund and serves as an essential companion for thoseseeking a deeper understanding of such issues.

In particular, the book offers expert insight and practical guidance to the followinggroups:

a) Owners of private funds and those involved in fundraising. The new landscape linksthe raising of funds to the reduction of risk and the culture of compliance. Some lia-bilities can find their way to the house (which will not be covered by insurance orunder the indemnity from the investors in the fund) and this is of critical importanceto the owners of the businesses.

b) In-house lawyers in the funds. It gives in-depth insight to the different risk areasand some of the key pitfalls for managing disputes in this sector, choosing thebest dispute resolution forum and ensuring that privilege is retained over docu-ments generated.

c) In-house compliance function. The new regulatory environment provides a chal-lenging background and the book provides innovative potential solutions to meetthe demands of investors, regulators and the owners of private funds as well as pro-viding an insight into the areas of risk.

d) Dispute resolution and compliance lawyers at law firms (whether specialist in funddisputes or not). The book provides specialist input on the pitfalls and aspects ofwinning and losing disputes in a fund setting, including advice from leading prac-titioners in their field on specific contentious and regulatory issues.

e) Fund formation and corporate lawyers. Several chapters tackle many of the key LPAterms that need to be carefully drafted to ensure that the true intention of partiescannot be misinterpreted by courts in the event of a dispute arising, and highlightthe risk areas that may prove traps for the unwary.

f) Deal teams and those involved in doing business either in their capacity as mem-bers of the fund or as directors of the portfolio companies. The book provides anunderstanding of the regulatory and other risks they face and that ultimately canlead to disputes.

With regards to the regulatory risk aspect of the book that apply to funds, I have soughtto identify the key risk areas that are of importance to investors and have, in practice,caused losses to funds: the focus is on bribery, competition law risk and sanctions.

A multi-jurisdictional approach is taken where appropriate to regulatory and litigationrisk. The possibility of fund disputes being litigated in different jurisdictions means some

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Editor’s introduction

chapters have been devoted to an understanding of dealing with disputes in key jurisdic-tions (England, Delaware, Jersey, Cayman Islands and the British Virgin Islands) as well aslooking at risk arising from some of the strictest and most proactive regulators (includingin the US, UK and China).

This book has only been possible with the help of the contributing authors, all of thempre-eminent experts in their field. In their chapters, they address the questions mostcommonly asked by those involved in fund-related disputes: from losing limited liabil-ity by participating in management (and the consequence of this) to the ability toenforce terms against defaulting investors. It covers potential solutions to the mostcommon dilemmas faced by private funds; for example, how to ensure compliance intheir portfolio companies without themselves assuming a greater degree of risk. Inaddition, I have written forewords to each chapter to provide a different perspective orsimply to reinforce the thrust of the chapters.

Managing Private Fund Disputes is unique in combining chapters that provide anessential guide to those working in funds wishing to have at their disposal the armouryfor managing disputes and risk reduction. Professional advisors in law firms (who maybe involved in litigation in the funds sector) may value the in-depth analysis of the keylegal issues. This may seem an ambitiously wide audience, but a breadth of topics isneeded in order to be in the best position to give and receive advice on both con-tentious and non-contentious areas. n

Hilton MervisKing & Wood Mallesons LLP

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About King & Wood Mallesons LLP

As the first and only global law firm to be headquartered in Asia, King & WoodMallesons (KWM) is connecting Asia to the world, and the world to Asia. With unparal-leled depth of inbound capability, KWM is uniquely placed to support regional clientsas they internationalise and international clients as they look to invest or expand intoAsia. Strategically positioned in the world’s growth markets, the firm is powered by2,700 lawyers across more than 30 international offices spanning Asia, Australia,Europe, the Middle East and North America. As a top 10 global firm by lawyer num-bers and the only firm in the world able to practise PRC, Hong Kong, Australian andEnglish law, KWM is providing clients with deep legal and commercial expertise, busi-ness acumen and real cultural understanding on the ground where they need it most.

King & Wood Mallesons has a truly international dispute resolution practice. The firmhas a well-established practice in the area of financial markets disputes and con-tentious regulatory matters, regularly working with investment and commercial banks,hedge funds, private equity funds, brokers, asset managers, other financial institutionsand high-net-worth individuals. King & Wood Mallesons has been involved in allaspects of fund disputes and in particular disputes with asset managers, from the per-spective of investors, funds, liquidators and asset managers. King & Wood Mallesons’litigation and dispute resolution lawyers specialise in solving complex business dis-putes as swiftly and effectively as possible, while providing solutions that ensure themost favorable outcome for clients that correspond to their business needs. The firmis consistently ranked among the top firms for dispute resolution in legal directories.The areas of expertise, in addition to corporate, partnership and fund-related disputes,include financial institutions and banking litigation, international arbitration, fraud.

King & Wood Mallesons is a market leader in structuring and closing private equityfunds. In the last 36 months (as at November 12, 2014) the firm has closed more inter-national private equity funds than any other law firm, excluding US domestic funds.We have one of the largest private equity teams of any law firm in the world and workwith private equity firms of all sizes from the largest international buyout funds tosmaller first-time funds. We understand the dynamics of the industry, its central play-ers, their organisational structures, needs and unique challenges. Our lawyers havestrong relationships with private equity sponsors across the market, as well as invest-ment banks and other institutional investors, which we leverage for the benefit of ourclients. The firm has been at the forefront of the private funds industry for over 30years designing innovative solutions in all jurisdictions and shaping the regulatoryenvironment. The firm’s position as a leading firm for private equity is widely acknowl-edged and recognised throughout the industry. The team offers the complete rangeof corporate finance services, which extends to all aspects of domestic and cross-bor-der transactions including private acquisitions and disposals, management buyouts,

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public takeovers, corporate reorganisations, offshore tax-driven structuring and jointventures, across a number of sectors.

Recent awards include: Most Innovative Law Firm: Asia Pacific (Financial Times AsiaInnovative Lawyer Awards 2014), Best Litigation Department (World Finance LegalAwards) and Best Law Firm: Fund Structuring (Unquote British Private Equity Awards2013), Law Firm of the Year: Fund Structuring (Unquote British Private Equity Awards2014 (4th year running)), Law Firm of the Year in Europe: Fund Formation (PrivateEquity International Awards, 2013 (13th year running)) and Legal Advisor of the Year:Funds (Private Equity Africa Awards 2014) and named one of the top 30 internationalarbitration firms in the world by Global Arbitration Review. n

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About PEI

PEI is the only financial information group focused exclusively on alternative assetfinance and investment. We specialise in covering the private equity, private debt, realestate and infrastructure industries globally and are increasingly active in other,emerging alternative investment fields and practices too. We are an independent com-pany with over 120 staff based in three offices – London, New York and Hong Kong –and are wholly owned by our management and employees.

We started in London in November 2001 when a team of managers at financial mediagroup Euromoney Institutional Investor PLC, with the backing of US-based investors,bought out a group of assets that centred on www.PrivateEquityInternational.com. In2001 we launched our first magazine: Private Equity International. A year later, weopened our New York office and launched two more titles: Private Funds Managementand PERE. In 2009 we launched Infrastructure Investor and in 2013, Private DebtInvestor. In 2014 we acquired Real Estate Capital and launched the SpecialistInvestment Networks.

PEI specialises in connecting practitioners active in our chosen asset classes with value-added market information and analysis via our print and digital publications and witheach other via marquee industry events. We help to define and convene these indus-tries. We now publish six magazines, host eight news websites, manage a very exten-sive set of databases dedicated to alternative assets, run in excess of 40 annualconferences globally and publish a library of more than 40 books.

The world’s largest investors in, and fund managers of, alternative assets are amongour many thousands of clients and we have customers based in nearly 100 differentcountries.

Since we started our aim has been to deliver timely and relevant products and servic-es to alternative asset professionals wherever they are based in the world. Our full-service regional offices in Hong Kong, London and New York mean that ourconnections with local markets are both broad and deep. The rapid growth in, andgeographic diversity of, our customers was acknowledged in 2009 when PEI wasawarded the Queen’s Award for Export in the International Trade category. n

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Documents

MANAGING PRIVATE FUND DISPUTES · By Matthew Crawford and Luke Stockdale, Maples and Calder Introduction 201 Courts in the Cayman Islands 201 Court procedures and timing 202 Access